Street Capitalist: Event Driven Value Investments

Whitney Tilson just put out a great presentation describing why Berkshire Hathaway (NYSE:BRK.B / BRK.A) is undervalued. I wanted to highlight a few points from the presentation:

Tilson notes that Berkshire Hathaway is transitioning away from being primarily an investment company, to being driven by earnings from its operations. A number of analysts have noted that one of the reasons for the Burlington Northern acquisition was to lessen the need for a great investor to manage Berkshire’s huge cash horde. The acquisition is expected to add a steady stream of income from a business that Buffett believes has great long-term prospects.

Tilson goes on to use a methodology for estimating Berkshire’s value that comes straight from Buffett himself: you take the company’s per share investments and add them to pretax earnings per share with a multiple attached. The chart shows that usually, the market ends up exceeding the company’s intrinsic value, although recently this has not been the case. There could be a number of reasons for this, including the recent financial crisis.

Using Tilson’s $142,500 estimate, we see that given current prices, Berkshire is undervalued by about 26%.

Lastly, Tilson points out that even though the intrinsic value of Berkshire Hathaway is just $142,500, the company should grow and add to cash within a year. Adjusting for these changes, Berkshire Hathaway may be undervalued by as much as 44%. Be sure to read the full presentation for more details on Tilson’s analysis.